Mixing unemployment with paid leave benefits makes little sense

Mixing unemployment with paid leave benefits makes little sense
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For three years in a row, the budget proposal of President TrumpDonald John TrumpThe Memo: Biden seeks revival in South Carolina Congress eyes billion to billion to combat coronavirus Sanders makes the case against Biden ahead of SC primary MORE has had a plan to add a paid parental leave program to the national unemployment insurance system. While there is indeed bipartisan support for expanding access to paid leave, doing so as part of the unemployment insurance system makes little sense. It would lead to significant hikes on job taxes, interfere with the core mission to help the unemployed, and increase all the billions of dollars misspent by the unemployment insurance system.

A fundamental problem with using the unemployment insurance program to operate a paid leave program has to do with how the federal and state unemployment insurance responsibilities are divided. Federal lawmakers set the unemployment insurance minimum benefit requirements, while state legislators set and collect payroll taxes that pay for those benefits. Even if a relatively small paid leave program, such as the White House plan for six weeks of parental leave, was added to unemployment insurance now, state lawmakers would have to raise taxes to pay for that benefit, as well as for any future benefit expansions mandated by federal legislators.

In effect, federal lawmakers would not be held accountable for tax hikes, even though they would be the ones to expand benefits, so that means raising job taxes and expanding benefits. A recent analysis found that if the “consensus” paid leave plan is added to unemployment insurance, it would double current unemployment insurance taxes, adding roughly $400 in taxes for workers each year. The most expensive proposal in Congress, known as the Family Act, would require 2.9 percent in payroll taxes, which means $1,450 in new taxes for a worker earning $50,000.


Most economists from across the spectrum agree that payroll taxes come directly out of worker wages, and that they harm wage growth. Creating new paid leave payroll taxes will take more money away from workers, particularly as the proposal would be in addition to existing plans to increase Social Security payroll taxes, and rising health care costs mean Medicare payroll taxes are also likely to rise.

Creating a new paid leave program within the unemployment insurance system also would weaken its dual goals of helping the unemployed find new jobs and paying benefits correctly. Both require major administrative resources and funds but tend to be judged as lower priorities than getting unemployment insurance checks out the door and to recipients quickly.

In 2009, when unemployment averaged 9.3 percent, more than half of the unemployed exhausted their regular insurance benefits without finding work. Last year, even with unemployment under 4 percent, one-third of insurance recipients ran out of benefits without finding work. More than $3 billion was spent incorrectly in the unemployment insurance system, meaning the error rate is 12.9 percent. These problems would most likely remain unsolved as the stretched administrative resources of the system focus on placing into effect and operating the new paid leave program.

There is a better way to administer a paid leave program. Since 1993, midsize and large employers have been required to offer unpaid leave benefits. A recent survey by the consulting company Mercer found that two-fifths of sampled firms now offer paid parental leave, an increase of almost 15 points from three years ago. In addition, the tax credits created by the 2017 tax reform law to partially offset the cost of paid leave should encourage more businesses to offer these benefits to their employees.

Innovation is also key to making this work. As my colleague Aparna Mathur has noted, policymakers and researchers are increasingly coming up with more new and creative alternatives to the federal program. For example, Republican Congressman Andy Biggs of Arizona introduced the Freedom for Families Act, legislation that would allow parents to access funds in health savings accounts to pay for some of the costs of parental leave.

A rising number of states are already running paid leave programs, and more are expected. Seven states have already enacted legislation, and at least 18 more states introduced legislation last year. This current system of state and employer paid leave benefits could be expanded to cover more, or even all, workers. That is a more logical next step, which would build on systems already in place, instead of creating yet another federal program when workers simply cannot afford such benefit promises in Washington.

Matt Weidinger served for more than two decades as a staff member of the House Ways and Means Committee. He now works as a resident fellow in poverty studies at the American Enterprise Institute based in Washington.